Goldman says dividend growth stocks will outperform under current conditions. 10 names it recommends

Published Mon, Apr 17 202312:51 PM EDT

Goldman Sachs says one income-focused strategy is off to a strong start this year, and will continue to outperform – dividend growth stocks. S & P 500 dividends grew by 8% year over year in the first quarter of 2023, according to a Friday note. On the other hand, buybacks dropped by 21% year over year in the fourth quarter, with companies likely to "a further slowdown" in the first quarter. Going forward, dividend growth stocks will continue to beat buyback stocks, according to Goldman's chief U.S. equity strategist David Kostin. As investors head into their first earnings season following the regional banking crisis in March, the strategist said the likelihood of tighter lending standards and slowing growth will continue to support stocks that pay strong dividends. "The difference in outlooks for dividend and buyback growth suggests firms focusing on dividends will continue to outperform buyback stocks," Kostin wrote. The Wall Street investment bank said it rebalanced its dividend growth basket accordingly. Here are 10 stocks it recommends, including some new additions. Pfizer is a new addition to the list. The pharma stock, which is down 20% this year, has a 4% dividend yield and an average analyst rating of overweight, according to FactSet data. Goldman's compound annual dividend growth forecast is 4% annually over 2022-2024. NetApp is a new addition to Goldman's dividend growth basket, as of March 13. The cloud storage stock has a dividend yield of 3%, and the price is up 12% this year. Goldman forecasts annual dividend growth of 3% from 2022-2024. Stifel recently upgraded NetApp to buy from hold , saying it's more sure of the company's plan to navigate a challenging macroeconomic backdrop following meetings with management. Thse initiatives include layoffs of 8% of NetApp's workers, as well as a revamp of its sales strategy. "We came away from the meetings more confident in our FY24 estimate -- $5.49 -- which reflects a soft 1H but a return to sales and EPS growth in 2H24," analyst Matthew Sheerin wrote in an April 9 note. Fastenal shares are up 12% this year, and the industrial supplies company has a 2.6% dividend yield, FactSet data showed. Goldman sees a dividend growth rate of 11% annually during 2022-2024. Home Depot shares are down this year, but was a new addition to Goldman Sachs' dividend growth list. The home improvement retailer sports a 2.9% dividend yield. Goldman sees HD raising its dividend 10% a year over the span from 2022-2024. Advertising firm Interpublic is on the Goldman list. The company is almost 14% higher this year, and has a 3.3% dividend yield, with Goldman estimating it will boost its dividend 7% annually over 2022-2024. Bank of America recently upgraded Interpublic shares to buy from neutral, saying the stock is "well suited for challenging times." "IPG has historically been the fastest growing (14% EPS CAGR 2017-22 versus peers -4/7%) and most reliable agency holding company," Bank of America's Adrien de Saint Hilaire wrote in a March 30 note. "We recently met with management and came away confident that 1) Current IPG specific headwinds are transient 2) Weakness in Tech/Telecom should be more than offset by strength in Healthcare 3) Costs are well under control," BofA said. Lowe's is another dividend growth stock, with a 2.1% dividend yield, and Goldman seeing 30% annual compound dividend growth over 2022-2024. The home improvement retailer, which is up more than 1% this year, was recently called a "top way to play" rising global temperatures by Wells Fargo. "We overlaid weather data against LOW's pre-pandemic comps and the results were what we'd expect —Q1 comps tend to be ~200bps higher in years with above average temperatures," Zachary Fadem wrote in an April 14 note.